The Mexican industrial real estate market is in a phase of rapid growth and transformation. While the economy has been weak for the past three years, demand for manufacturing, warehouse and distribution space has remained stable but slow. Meanwhile, institutional investment capital has increasingly flowed into the country through major REITs, pension funds and other foreign sources. This has created an environment with strong demand for investment opportunities and a relatively limited demand for new facility leases. This combination has made Mexico’s industrial real estate market increasingly competitive and is generating significant opportunities for new companies looking to buy or lease a facility in Mexico.
This section will provide a general introduction to real estate law and the industrial market in Mexico. Topics such as rental rates, availability and options are discussed in briefly each city chapter, but as each operation has specific real estate requirements, we have intentionally not tried to provide blanket market information. We will be happy to discuss any potential project you have on a confidential basis and cover these topics in detail.
Laws Governing Real Estate in Mexico
Mexico’s property system has some distinct differences from that found in the U.S. The Mexican Constitution is at the top of the legal framework. Underneath, and second tier of federal and international laws cover issues of trade, the environment, and real estate. The NAFTA agreement and other international trade rules belong to this second tier, which includes:
- The Foreign Investment Law
- The Federal Procedures Code
- The Federal Environmental Protection Law
- The Federal Law for the Use of Land
- Tax Laws
- The Commercial Code
- The Agrarian Law
- The Customs Law
- The General Law of National Properties
- Notary Law and Federal Law of Public Brokerage
- Federal Zone Regulations
Finally, the third tier of laws include civil codes of the individual states.
Purchasing Real Estate in Mexico
Purchasing a manufacturing facility can be accomplished through ownership in fee simple or a trust involving a Mexican bank. Article 27 of the Mexican Constitution establishes the ownership regulations for the country’s land and waters, and controls any real estate contract. The most important provision covers real estate ownership.
There are two kinds of areas in Mexico where land ownership by foreign interests is prohibited: a 62 miles strip (100 km) strip along the border and a 31 miles strip (50 km) along the coast. In these areas, foreign-owned maquiladoras need to acquire trust rights to real estate through creation of a trust with a Mexican bank of its choice as trustee. This trust is known as the “fideicomiso.”
The bank, as trustee, buys the property for the foreign company, and has a fiduciary obligation to follow instructions given by the beneficiary. It is important to highlight that the trust rights allow full use and enjoyment to the beneficiary of the trust. It may use, dispose of, encumber, and sell such rights, and it may receive any income earned from the property.
In summary, the following parties are involved in a real estate trust:
- The seller of the property, or trustor (el fideicomitente) who transfers title to the property to the bank.
- The bank, which acts as trustee (el fiduciario) and holds title to the property and is obligated to administer the property for the benefit of the buyer or beneficiary.
- The buyer, or beneficiary (el fideicomisario) who is entitled to use, enjoy, lease, or sell the property held in the real estate trust without limitation whatsoever.
These regulations do not apply to the lease of industrial space or to the purchase of real estate outside the restricted border and coastal zones.
Companies that want to acquire real estate in Mexico have to be organized pursuant to a public instrument executed before a public notary and recorded in the Public Registry of Property and Commerce.
Mechanics of a Real Estate Transaction
When buying or selling real estate, once an agreement is reached on price and terms, it will be necessary to go before a notary and provide him with a copy of the background deed, appraisal of the property, evidence of payment of real estate property taxes and water contributions, the zoning authorizations and any subdivision authorizations. Once the notary receives all documents, he proceeds to calculate income taxes, transfer taxes, registration fees and his own fees. After the parties sign the document and all taxes are paid, the Notary will file it with the Public Records of Property.
The Public Notary Role
Notaries in Mexico play a larger role in a real estate transaction than their counterparts in the U.S. First off, they are appointed by the state government and are responsible for calculating income and transfer taxes, registration fees and other governmental charges. Moreover, they are responsible for the full compliance of the transaction with Mexican Law, including: verifying the existence of liens, explaining the legal scope of the transaction to the parties, verifying the authority of the representatives and verifying the legality of the background deeds. Finally, notaries are also personally liable for any violation to Mexican Law or non-payment of taxes related to a real estate transaction.
Main Ownership Closing Costs
The main closing costs in any real estate transaction are the following:
For the Buyer:
- Value Added Tax (VAT). VAT is 15% (10% in the border region) over the value of real estate improvements and buildings.
- Acquisition (Real Estate) Tax. Equivalent to 2-3% of the value of the real estate (depending on the state), and are payable by the buyer. Generally, the tax base for this tax is the higher of the appraised value, the transaction value or the real estate property tax value. This tax is paid whether the property is sold, transferred, donated, placed into trust, split off or merged.
- Registration fees. This varies from state to state, but generally is 1% to 1.5% of the value of the transaction.
- Notary fees and expenses. Charged for services provided by the Notary Public. They are about 1.5% to 2% of the transaction value, plus the cost of the official appraisal.
- Appraisal Tax. The Tax Authority may choose to perform a commercial appraisal of the property. If the appraisal value is greater than 10% of the price that the buyer paid, the buyer will be asked to pay 20% tax on the difference between the two amounts.
- Bank Trust Fee. For property purchased within the 50/100km restricted zones. Set-up fees can cost up to US$750, with annual service charges between US$300-US$500.
- Title Insurance. Rates are based on the sale value of the property and are charged at around US$5-US$5.50 per US$1,000 of value. This cost is incurred only once, at the time of purchase.
Additionally, there is an annual property tax, but in relation to U.S. property taxes, it is negligible.
For the Seller:
- Income Taxes on Property Gains. The seller pays this tax directly. It is a capital gain tax paid at the rate of the taxpayer. The seller may either pay 20% on the gross amount of the transaction, or elect to pay 40% tax on the net profit obtained from the property. This law prevents short-term speculation in the property market.
- Broker’s Commission. Expect charges of 3% to 6% of the value of a lease or sale. Paid directly by the seller or landlord.(Source: Lex Corp Abogados & Mexperience)
Leasing Real Estate in Mexico
Due to the increase of capital flowing into Mexico’s industrial real estate market, lease costs have dropped dramatically in the past 4 or 5 years and leasing is becoming much more common. A lease can be arranged for existing properties or new construction, depending on operating requirements and availability of space in a certain market.
A lease contract in Mexico will be similar to those in the U.S., covering the same business and legal points. However, depending on the corporate structure in Mexico, special attention needs to be paid to FAS 13 and Sarbanes-Oxley compliance, which may or may not be understood by a Mexican developer. Additionally, there are a number of key items that differ from leasing real estate in the U.S., such as electricity connection charges. These are due diligence items that need to be understood upfront, but should not present any major barrier to leasing. Local real estate service providers, such as CBRE, have a long history working with new companies to Mexico and negotiating real estate contracts on their behalf.
Generally, leases range from three to ten years and are structured to be compliant with U.S. accounting rules and regulations. Tenants will have the option to renew the lease for a period determined during initial lease negotiations. This option depends on the terms of the contract and it is commonly done at least 60 days prior to termination of the lease.
Rent is paid on a monthly basis, while the rental rates are adjusted on an annual basis according to some set schedule (usually U.S. CPI or 2%). Rents are typically quoted in U.S. dollars, but can either be per square meter or per square foot, and monthly or annually. For example, a rental rate in Cd. Juarez may be $4.62/SM/month or $5.04/SF/year.
Almost all leases in Mexico are triple net leases, meaning that the tenant pays for the majority of facility maintenance costs. Prospective tenants need to be aware if a rate is quoted on a NNN or gross basis. The difference is operating expenses. NNN operating expenses include taxes, building insurance and common area maintenance and are paid by the tenant. The NNN expenses in Mexico will add anywhere from $0.10 to $0.50 per square foot per year to a lease rate.
Under a NNN lease, the landlord is typically responsible for all structural maintenance costs, including roof, walls and parking areas. However, maintenance responsibility is a business point to be negotiated with the lease contract.
Most leases in Mexico require some form of credit enhancement or a guarantee from the parent company outside of Mexico. If a guarantee is not an option, a letter of credit or additional security deposit can also be used. While a landlord’s lender will typically require some form of security, it is a point to be negotiated with the lease.
Main Leasing Costs
In addition to the net rent, tenants need to pay real estate taxes and a maintenance fee. All payments associated with the premises are subject to the Value Added Tax (VAT) of 15 % (10% in the border region). Please note that the VAT is reimbursed to the company at the end of the year, offset by other tax payments that company may have made.
These are the most common costs that the tenant encounters at the time of occupation:
- One or two month’s rent as security deposit, held until the termination of the lease
- Rent for the first month paid in advance
- Connect fee paid for utilities (electricity rights are very expensive in Mexico)